What’s the difference between an overdraft and a business loan?
Business loans and overdrafts are both lending options. They both involve borrowing money from the bank, but under different conditions and for different reasons. They can help businesses stay afloat or get ahead by providing much-needed funds precisely when they’re needed.
What is a business loan?
Business loans are granted for a specific time period. For instance, you may only need a short-term loan to finance a phone system upgrade that you’ll pay off quickly. On the other hand, you’ll probably need a longer term for paying off expensive manufacturing equipment, company cars or property.
What is an overdraft?
Overdrafts are a borrowing option set up through your bank to help you manage your short-term cash flow needs. They’re sometimes called revolving credit facilities and are part of your business bank account.
How do overdrafts work?
Overdrafts are used only when needed, such as when buying new stock or increasing cash flow. They’re intended to tide a business over temporarily. For example, if a customer places a large order and will be paying in 30 days, you may need to tap into your overdraft to buy raw materials or stock to fulfil that order. Once the customer pays, you can pay off the debt.
When your account has an overdraft facility, you can draw more money on the account than your credit balance. For example, if you have $15,000 credit in your overdraft account but need to cover $20,000 in payroll for the month, you could withdraw the cash you have on hand along with the extra $5,000 needed for payroll without having to take out a business loan.
Do I need to pay interest on an overdraft?
Because an overdraft is a type of lending facility, you will need to pay it back, and yes, there will be interest to pay as well.
When you establish an overdraft account, you’ll be given a maximum limit of how much you can withdraw. Withdrawals don’t need to be for a specific amount. You can withdraw small or large amounts, up to your limit, as needed.
Interest applies only to the balance outstanding, not the full amount. So, if you have a $30,000 overdraft account but only use $5,000, interest will only be applied to the $5,000 outstanding balance.
How many overdrafts can I have?
An overdraft facility can be linked to any eligible business account, but only one overdraft per business. Contact your Business Banker today to find out more.
How can I find out more about business loans and overdrafts?
Your Business Banker can help you better understand the differences between business loans and overdrafts so you can choose the best option for your needs. Contact us today to find out more.